A proposal to retroactively raise taxes on higher earning individuals and businesses is being considered by state lawmakers who have not yet indicated when it will be voted on before the Legislature adjourns Aug. 31.
AB 1253 would impose an additional 1% tax on those earning $1 million or more; 2% on $2 million or more, and 3.5% on $5 million or more; it would apply to the current tax year that started Jan. 1, 2020.
California’s top earners currently pay a state income tax rate of 13.3%, the highest in the nation.
By adding to the costs borne by high earners and businesses, the bill would impede the state’s economic recovery amid the COVID-19 pandemic, David Kline, vice president of communications and research with the California Taxpayers Association (CalTax), said in an email to the Northern California Record.
“A tax increase of this magnitude will hinder the state's recovery by increasing the likelihood that high-earning Californians and business owners will move to one of the 49 states [with] lower taxes,” Kline said. “Prior to COVID-19, California's existing tax structure was bringing in enough revenue to pay for major spending increases even while building up reserves of approximately $21 billion. Economic growth is the key to generating revenue, but this growth is discouraged every time California officials propose another tax.”
The July 31 analysis by the Senate Committee on Governance and Finance notes that starting the tax this year could be too soon. “Individuals subject to the bill’s additional tax may face a large unexpected tax bill due,” the analysis states. “The committee may wish to consider whether a 2021 start date may be more appropriate to ease the burden on taxpayers by giving them an additional year to prepare.”
- The increase would mean 14.3% tax on income of $1 million to $2 million
- 15.3% for income ranging from $2 million to $5 million
- 16.8% for income above $5 million
“The tax will discourage growth and encourage some of the state's largest taxpayers to leave California no matter when it is passed,” Kline said. “If the tax is retroactive, the fundamental unfairness will create more distrust of the government, and could speed up the exodus. Since a small number of high-income Californians pay the vast majority of our total state income tax dollars, the impact on the state could be very significant.”
During the Senate committee’s Aug. 3 hearing on AB 1253, Peter Blocker, CalTax Vice President of Policy, noted that the bill’s tax rates far exceed other states.
“This difference is really staggering when you consider that the next highest rate is Hawaii at 11 percent and that some states don’t even impose an income tax,” Blocker said. “And it won’t take many taxpayers leaving to impact the state's budget since it relies so heavily on so few taxpayers.
“One-half of 1 percent of tax filers who reported income above $1 million paid more than 40 percent of the total income tax revenue collected by the state,” Blocker said.
The committee meeting was for testimony on AB 1253; a vote has not yet been scheduled.